Bondholders vs Shareholders
The interest accrued on a savings account is never enough to help you multiply your wealth and achieve financial freedom. Investors such as Rakesh Jhunjhunwala started with just Rs 5,000 and went on to become a billionaire by investing in various financial instruments available in the market. Wealth appreciation of such scale could have never been possible through bank interest or other instruments that do not provide high returns.
When investors enter the financial market, they get confused among various instruments and the related jargon. For example, if you are investing in the share market, there are terms such as IPO, Demat account, shareholders, etc. On the other hand, if you invest in bonds, you hear about terms such as coupon rate, yield, bondholders, etc.
Since investing in shares and bonds have been rising in India by a huge margin, this blog details the difference between bondholder and shareholders. Let’s start with the common definitions.
What are Shares?
In simple words, a share indicates a unit of ownership of a particular company. If you own the shares of a company, it implies that you, as an investor, own a percentage of the issuing company. These shares are listed on the stock exchange through the means of an Initial Public Offering, and investors can buy and sell them based on their current price.
What are Bonds?
Bonds are debt instruments, which implies that they work on the principle of loans, where a company issues bonds to borrow money from the lender. The company promises the lender a regular predetermined interest on the principal amount. In bond terms, this interest rate is called a coupon.
Definition and meaning of shareholders and bondholders
If you buy the shares of a company, you become the owner of the company in the proportion of the percentage of bought shares. From the day you buy the shares, you are a shareholder. As a shareholder, you are entitled to receive a portion of the profit of the company. This amount is called the dividend amount, and it is up to the company to declare it as per its financial performance. The shareholders can sell these shares anytime they want to another investor who would then become the shareholder.
A shareholder of a company isn’t always an individual. As various other entities operate and invest in companies, a shareholder can be an organization, a consortium, or a government department. However, once you sell your shares, you are no longer a shareholder, and the dividend benefit ceases to exist.
Bondholders are the people or the organization that has bought a bond for a particular company. If you buy a bond, you are called a bondholder and have essentially added to the efforts of the bond creator to raise funds. In return, you are provided with a regular interest (coupon rate) on the amount you have invested in buying the bond. In most cases, bonds come with a fixed interest rate, which they are legally liable to pay to the bondholder at predetermined intervals.
As a bondholder, you can make profits by holding the bond and receiving regular interest payments, or you can sell the bond at a higher price compared to the cost price. However, if you choose the latter, you are no longer called a bondholder and are not entitled to the interest payment from the day you sell the bond.
How do bondholders and stockholders work?
The idea behind both of the terms is simple–you buy a bond, you become a bondholder; you buy shares, you become a shareholder. However, bondholders do not get to realize the same benefits as shareholders. For example, bondholders do not become the owners of the company they buy bonds of. They merely use their money to buy bonds, and the company uses the money for business operations. Hence, bondholders directly transact with a company when they initially buy bonds and then sell them in the secondary market.
In the case of shareholders, they become the owner of the company in the proportion of the shares they hold. The ownership entitles them to have a say in the decision-making of the company. For example, they can participate in the company’s Annual General Meeting (AGM) and vote on various decisions, even on who will be appointed the CEO or a pay rise for an executive.
When deciding on payment, bondholders are preferred over shareholders. Companies are legally bound to pay bondholders a regular interest payment based on the coupon rate. However, companies are not legally bound to pay a dividend to shareholders. Only if they make profits can they choose to do so. However, in the case of bondholders, even if the company makes a loss, they are liable to pay the interest amount.
Now that you have understood the difference between bondholders and shareholders, you can make informed decisions on investing your money. Being a bondholder can give you regular interest payments, but being a shareholder provides you with a chunk of the ownership. Both these instruments can prove to be effective financial instruments that can allow you to make profits based on price fluctuations.
Frequently Asked Questions Expand All
A person who buys the shares of a company is called the shareholder and becomes the owner of the company at par with the portion of shares held. These shareholders have a say in the decision making of the company along with voting rights. In the case of bondholders, they do not become the owner of the company and have no say in the decision making of the company. Furthermore, bondholders do not get voting rights.
Stockholders get ownership benefits at par with the percentage of shares they hold, giving them voting rights and a say in the company’s decision-making. They are also entitled to dividend payments if the company announces a dividend after making profits. On the other hand, the bondholders are entitled to a regular interest payment based on the coupon rate. No other benefits are available to bondholders.